UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-10435
STURM, RUGER & COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-0633559
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(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) identification no.)
Lacey Place, Southport, Connecticut 06890
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(Address of principal executive offices) (Zip code)
(203) 259-7843
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the issuer's common stock as of March
29, 2008: Common Stock, $1 par value - 20,788,000.
Page 1 of 30
INDEX
STURM, RUGER & COMPANY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed balance sheets - March 29, 2008 and December 31, 2007 3
Condensed statements of operations - First quarter of 2008 and 2007 5
Condensed statement of stockholders' equity - First quarter of 2008 6
Condensed statements of cash flows - First quarter of 2008 and 2007 7
Notes to condensed financial statements - March 29, 2008 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits 29
SIGNATURES 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
March 29, 2008 December 31, 2007
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(Note)
Assets
Current Assets
Cash and cash equivalents $ 3,820 $ 5,106
Short-term investments 30,420 30,504
Trade receivables, net 18,334 15,636
Gross inventories 63,788 64,330
Less LIFO reserve (46,956) (46,890)
Less excess and obsolescence reserve (3,569) (4,143)
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Net inventories 13,263 13,297
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Deferred income taxes 6,317 5,878
Prepaid expenses and other current assets 3,169 3,091
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Total current assets 75,323 73,512
Property, plant and equipment 121,231 126,496
Less allowances for depreciation (98,338) (104,418)
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Net property, plant and equipment 22,893 22,078
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Deferred income taxes 3,607 3,626
Other assets 2,646 2,666
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Total Assets $ 104,469 $ 101,882
================================================================================
See notes to condensed financial statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
March 29, 2008 December 31, 2007
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(Note)
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable and accrued expenses $ 8,460 $ 8,102
Product liability 1,161 1,208
Employee compensation and benefits 6,764 4,860
Workers' compensation 5,627 5,667
Income taxes payable 1,417 411
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Total current liabilities 23,429 20,248
Accrued pension liability 2,741 4,840
Product liability accrual 673 725
Contingent liabilities - Note 8 -- --
Stockholders' Equity
Common Stock, non-voting, par value $1:
Authorized shares 50,000; none issued -- --
Common Stock, par value $1: Authorized shares
40,000,000; 22,787,812 issued and
20,571,817 outstanding 22,788 22,788
Additional paid-in capital 1,941 1,836
Retained earnings 86,286 84,834
Less: Treasury stock - 2,215,995 shares, at cost (20,000) (20,000)
Accumulated other comprehensive loss (13,389) (13,389)
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Total Stockholders' Equity 77,626 76,069
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Total Liabilities and Stockholders' Equity $ 104,469 $ 101,882
================================================================================
Note:
The balance sheet at December 31, 2007 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
See notes to condensed financial statements.
4
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
First Quarter 2008 2007
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Net firearms sales $ 40,030 $ 43,669
Net castings sales 2,476 4,787
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Total net sales 42,506 48,456
Cost of products sold 31,851 32,893
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Gross profit 10,655 15,563
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Expenses:
Selling 4,388 3,387
General and administrative 3,941 4,312
Other operating expenses (income), net -- (34)
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Total expenses 8,329 7,665
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Operating income 2,326 7,898
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Other income:
Gain on sale of real estate -- 5,168
Interest income 163 448
Other income (expense), net (147) (58)
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Total other income, net 16 5,558
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Income before income taxes 2,342 13,456
Income taxes 890 5,396
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Net income $ 1,452 $ 8,060
================================================================================
Earnings per share
Basic $ 0.07 $ 0.36
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Diluted $ 0.07 $ 0.36
======== ========
Average shares outstanding
Basic 20,572 22,639
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Diluted 20,606 22,848
======== ========
See notes to condensed financial statements.
5
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in thousands)
Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive
Stock Capital Earnings Stock Loss Total
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Balance at December 31, 2007 $ 22,788 $ 1,836 $ 84,834 $ (20,000) $ (13,389) $ 76,069
Net income 1,452 1,452
Stock-based compensation,
net of tax 105 105
-------------
Comprehensive income 1,557
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Balance at March 29, 2008 $ 22,788 $ 1,941 $ 86,286 $ (20,000) $ (13,389) $ 77,626
====================================================================================================================================
See notes to condensed financial statements.
6
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
First Quarter 2008 2007
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Operating Activities
Net income $ 1,452 $ 8,060
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 1,117 1,091
Gain on sale of assets -- (5,201)
Deferred income taxes (420) 908
Changes in operating assets and liabilities:
Trade receivables (2,698) 836
Inventories 34 9,742
Trade accounts payable and other liabilities 2,222 (1,381)
Product liability (99) (151)
Prepaid expenses and other assets (2,052) 321
Income taxes 1,006 3,858
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Cash provided by operating activities 562 18,083
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Investing Activities
Property, plant and equipment additions (1,932) (740)
Proceeds from the sale of assets -- 7,379
Purchases of short-term investments (6,666) (26,899)
Proceeds from maturities of short-term investments 6,750 --
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Cash used for investing activities (1,848) (20,260)
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Decrease in cash and cash equivalents (1,286) (2,177)
Cash and cash equivalents at beginning of period 5,106 7,316
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Cash and cash equivalents at end of period $ 3,820 $ 5,139
=============================================================================================
See notes to condensed financial statements.
7
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 29, 2008
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of management, the accompanying unaudited condensed
financial statements include all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the results of the
interim periods. Operating results for the first quarter of 2008 are not
indicative of the results to be expected for the full year ending December 31,
2008. These financial statements have been prepared on a basis that is
substantially consistent with the accounting principles applied in our Annual
Report on Form 10-K for the year ended December 31, 2007.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Organization:
Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the
design, manufacture, and sale of firearms to domestic customers. Approximately
94% of the Company's total sales for the first quarter of 2008 were firearms
sales, and 6% were investment castings sales. Export sales represent less than
5% of total sales. The Company's design and manufacturing operations are located
in the United States and substantially all product content is domestic. The
Company's firearms are sold through a select number of independent wholesale
distributors principally to the commercial sporting market.
The Company manufactures investment castings made from steel alloys for
internal use in its firearms and utilizes available investment casting capacity
to manufacture and sell castings to outside customers.
Change in Interim Fiscal Reporting
In 2008, the Company is now reporting its first three fiscal quarters
ending on the last Saturday of March, June and September, respectively. Each of
these fiscal quarters will be comprised of thirteen complete weeks. For 2008,
the three quarters will end on March 29, 2008, June 28, 2008, and September 27,
2008. This change was made to provide a better comparison of the Company's
reported results with those reported in prior years. The Company's fiscal year
end remains December 31. The impact of this change on results of operations for
the first quarter of 2008 is not significant.
8
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications:
Certain prior year balances have been reclassified to conform with current
year presentation.
Recent Accounting Pronouncements:
In September 2006, FASB issued FAS No. 157, "Fair Value Measurements" (FAS
157). FAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for the fiscal year beginning January 1, 2008. The FASB has deferred
the implementation of FAS 157 by one year for certain non-financial assets and
liabilities such as this will be effective for the fiscal year beginning January
1, 2009. The adoption of FAS 157 did not have a material impact on the Company's
financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("FAS 141R"). FAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. FAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. FAS 141R is effective for the fiscal year
beginning January 1, 2009, and will be adopted by the Company in the first
quarter of 2009. The adoption of FAS 141R is not expected to have a material
impact on the Company's financial position, results of operations and cash
flows.
NOTE 3 - INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method. An
actual valuation of inventory under the LIFO method can be made only at the end
of each year based on the inventory levels and costs existing at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
During the first quarter of 2008, inventory quantities were reduced. This
reduction in inventory levels is expected to continue through year-end and will
result in a liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years as compared with the current cost of purchases.
Although the effect of such a liquidation cannot be precisely quantified at the
present time, management believes that if a LIFO liquidation does occur in 2008,
the impact will not be material to the Company's results of operations for the
period and will not have a material impact on the financial position of the
Company.
9
Inventories consist of the following (in thousands):
March 29, December 31,
2008 2007
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Inventory at FIFO
Finished products $ 6,687 $ 8,413
Materials and work in process 57,101 55,917
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Gross inventory 63,788 64,330
Less: LIFO reserve (46,956) (46,890)
Less: excess and obsolescence reserve (3,569) (4,143)
--------------------------------------------------------------------
Net inventories $13,263 $13,297
====================================================================
The LIFO impact on FIFO inventory increased from 74% at December 31, 2007
to 76% at March 29, 2008. The excess and obsolescence reserve decreased as a
result of this increase as well as from the disposition of previously reserved
inventory.
NOTE 4 - INCOME TAXES
The Company's 2008 effective tax rate differs from the statutory tax rate
due principally to state income taxes partially offset by tax benefits related
to the American Jobs Creation Act of 2004. The Company's 2007 effective tax rate
differs from the statutory tax rate due principally to state income taxes. The
effective income tax rate for the first quarter of 2008 is 38.0%. The Company's
2008 effective tax rate is lower than the 2007 effective tax rate of 40.1%
principally as a result of increased benefit of Federal manufacturing income tax
credits.
The Company files income tax returns in the U.S. Federal jurisdiction and
various state jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal and state income tax examinations by tax authorities for
years before 2004. In the third quarter of 2007, the Internal Revenue Service
(IRS) completed an examination of the Company's Federal income tax return for
2005. The IRS did not propose any adjustments as a result of this examination
and has accepted the Company's return as filed.
The Company adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes," on January 1, 2007. Upon the
adoption of FIN 48, the Company commenced a review of all open tax years in all
jurisdictions. The Company does not believe it has included any "uncertain tax
positions" in its Federal income tax return or any of the state income tax
returns it is currently filing. The Company has made an evaluation of the
potential impact of additional state taxes being assessed by jurisdictions in
which the Company does not currently consider itself liable. The Company does
not anticipate that such additional taxes, if any, would result in a material
change to its financial position. However, the Company anticipates that it is
more likely than not that additional state tax liabilities in the range of $0.4
to $0.7 million exist. The Company has recorded $0.4 million relating to these
additional state income taxes, including approximately $0.2 million for the
payment of interest and penalties. This amount is included in income taxes
payable at March 29, 2008. In connection with the adoption of FIN 48, the
Company will include interest and penalties related to uncertain tax positions
as a component of its provision for taxes.
NOTE 5 - PENSION PLANS
The Company is shifting its retirement benefit focus from defined benefit
pension plans to defined contribution retirement plans, utilizing its current
401(k) plan.
10
In the third quarter of 2007, the Company amended its hourly and salaried
defined benefit pension plans so that employees no longer accrue benefits under
them effective December 31, 2007. This action "freezes" the benefits for all
employees and prevents future hires from joining the plans, effective December
31, 2007. Starting January 1, 2008, the Company provides supplemental
discretionary contributions to substantially all employees' individual 401(k)
accounts.
In late 2007, after authorizing the "freeze" amendment to its hourly and
salaried defined benefit pension plans, the Company contributed an additional $5
million to these plans. The intent of this discretionary contribution was to
reduce the amount of time that the Company will be required to continue to
operate the frozen plans. The ongoing cost of running the plans (even if frozen)
is approximately $0.2 million per year, which includes PBGC premiums, actuary
and audit fees, and other expenses.
In 2008 and future years, the Company may be required to make cash
contributions to the two defined benefit pension plans according to the new
rules of the Pension Protection Act of 2006. The annual contributions will be
based on the amount of the unfunded plan liabilities derived from the frozen
benefits and will not include liabilities for any future accrued benefits for
any new or existing participants. The total amount of these future cash
contributions will be dependent on the investment returns generated by the
plans' assets and the then-applicable discount rates used to calculate the
plans' liabilities.
There is no minimum required cash contribution for the defined benefit
plans for 2008. However, the Company expects to contribute $0.5 million to the
defined benefit plans in 2008. The intent of this discretionary contribution in
2008 is to reduce the amount of time that the Company will continue to incur
costs to operate the frozen plans.
The total annual cash outlays for retirement benefits, which include the
continuing funding of the two defined benefit pension plans and the new
supplemental discretionary 401(k) contributions, are expected to be comparable
to the previous retirement funding levels.
In February 2008, the Company made lump sum benefit payments to two
participants in its only non-qualified defined benefit plan, the Supplemental
Executive Retirement Plan. These payments, which totaled $2.1 million,
represented the actuarial present value of the participants' accrued benefit as
of the date of payment. Only one, retired participant remains in this plan.
The estimated cost of the defined benefit plans is summarized below (in
thousands):
First Quarter 2008 2007
--------------------------------------------------------------------
Service cost -- $352
Interest cost $997 727
Expected return on plan assets (1,277) (893)
Amortization of prior service cost -- 34
Recognized actuarial gains 303 262
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Net periodic pension cost $23 $482
====================================================================
Costs attributable to the discretionary supplemental 401(k) plan totaled
$0.4 million in the first quarter of 2008. The Company plans to contribute an
additional $1.1 million to the plan during the remainder of 2008.
11
NOTE 6 - SHARE BASED PAYMENTS
In 1998, the Company adopted, and in May 1999 the shareholders approved,
the 1998 Stock Incentive Plan (the "1998 Plan") under which employees were
granted options to purchase shares of the Company's Common Stock and stock
appreciation rights. The Company reserved 2,000,000 shares for issuance under
the 1998 Plan. These options have an exercise price equal to the fair market
value of the shares of the Company at the date of grant, become vested ratably
over five years, and expire ten years from the date of grant. In April 2007, all
reserved shares for which a stock option had not been granted under the 1998
Plan were deregistered. No further stock options or stock will be granted under
the 1998 Plan.
On December 18, 2000, the Company adopted, and in May 2001 the
shareholders approved, the 2001 Stock Option Plan for Non-Employee Directors
(the "2001 Plan") under which non-employee directors were granted options to
purchase shares of the Company's authorized but unissued stock. The Company
reserved 200,000 shares for issuance under the 2001 Plan. Options granted under
the 2001 Plan have an exercise price equal to the fair market value of the
shares of the Company at the date of grant and expire ten years from the date of
grant. Twenty-five percent of the options vest immediately upon grant and the
remaining options vest ratably over three years. In April 2007, all reserved
shares for which a stock option had not been granted under the 2001 Plan were
deregistered. No further stock options or stock will be granted under the 2001
Plan.
In April 2007, the Company adopted and the shareholders approved the 2007
Stock Incentive Plan (the "2007 SIP") under which employees, independent
contractors, and non-employee directors may be granted stock options, restricted
stock, deferred stock awards, and stock appreciation rights, any of which may or
may not require the satisfaction of performance objectives. Vesting requirements
will be determined by the Compensation Committee or the Board of Directors. The
Company has reserved 2,550,000 shares for issuance under the 2007 SIP.
In 2007, a total of 10,920 deferred stock awards were issued to
non-employee directors, which will vest in April 2008. Compensation expense
related to these awards are amortized ratably over the vesting period. The total
compensation expense related to these awards is $0.1 million.
A summary of changes in options outstanding under the Plans is summarized
below:
Weighted Average Grant Date
Shares Exercise Price Fair Value
--------------------------------------------------------------------------------
Outstanding at December 31, 2007 1,091,250 $9.44 $3.91
Granted 100,000 $7.97 $4.47
Exercised -- -- --
Expired -- -- --
--------------------------------------------------------------------------------
Outstanding March 29, 2008 1,191,250 $9.31 $3.95
--------------------------------------------------------------------------------
The aggregate intrinsic value (mean market price at March 29, 2008 less
the weighted average exercise price) of options outstanding under the Plans was
approximately $0.9 million.
The aggregate compensation expense for the options granted in the first
quarter of 2008, calculated using the Black-Scholes option-pricing model, was
$0.3 million. This expense, which is a non-cash item, is being amortized in the
Company's statements of operations over the five year vesting period.
Compensation costs related to all share-based payments recognized in the
statements of operations aggregated $0.1 million and $0.1 million for the first
quarter of 2008 and 2007, respectively.
The Company has adopted a policy to pay 25% of all officers' annual
incentive compensation in deferred stock which vests over three years commencing
on the date of the award. As of March 29, 2008, no deferred stock has been
awarded.
12
NOTE 7 - BASIC AND DILUTED EARNINGS PER SHARE
Weighted average shares outstanding as of March 29, 2008 and March 31,
2007 were 20,571,800 and 22,638,700, respectively.
Diluted earnings per share reflect the impact of options outstanding using
the treasury stock method, when applicable. This resulted in diluted
weighted-average shares outstanding for the first quarters of 2008 and 2007 of
20,606,000 and 22,848,000, respectively.
NOTE 8 - CONTINGENT LIABILITIES
As of March 29, 2008, the Company is a defendant in approximately 5
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into two categories:
(i) those that claim damages from the Company related to allegedly
defective product design which stem from a specific incident.
Pending lawsuits and claims are based principally on the theory of
"strict liability" but also may be based on negligence, breach of
warranty, and other legal theories; and
(ii) those brought by cities or other governmental entities, and
individuals against firearms manufacturers, distributors and dealers
seeking to recover damages allegedly arising out of the misuse of
firearms by third parties in the commission of homicides, suicides
and other shootings involving juveniles and adults. The complaints
by municipalities seek damages, among other things, for the costs of
medical care, police and emergency services, public health services,
and the maintenance of courts, prisons, and other services. In
certain instances, the plaintiffs seek to recover for decreases in
property values and loss of business within the city due to criminal
violence. In addition, nuisance abatement and/or injunctive relief
is sought to change the design, manufacture, marketing and
distribution practices of the various defendants. These suits
allege, among other claims, strict liability or negligence in the
design of products, public nuisance, negligent entrustment,
negligent distribution, deceptive or fraudulent advertising,
violation of consumer protection statutes and conspiracy or concert
of action theories. Most of these cases do not allege a specific
injury to a specific individual as a result of the misuse or use of
any of the Company's products.
The Company has expended significant amounts of financial resources and
management time in connection with product liability litigation. Management
believes that, in every case involving firearms, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses further exist to the suits brought
by governmental entities based, among other reasons, on established state law
precluding recovery for essential government services, the remoteness of the
claims, the types of damages sought to be recovered, and limitations on the
extraterritorial authority which may be exerted by a city, municipality, county
or state under state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal shootings by
third-parties to ever be permitted to go before a constitutional jury, Hamilton,
et al. v. Accu-tek, et al., resulted in a defense verdict in favor of the
Company on February 11, 1999. In that case, numerous firearms manufacturers and
distributors had been sued, alleging damages as a result of alleged negligent
sales practices and "industry-wide" liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of
the seven cases decided by the jury. In subsequent proceedings involving other
defendants, the New York Court of Appeals as a matter of law confirmed that 1)
no legal duty existed under the circumstances to prevent or investigate criminal
misuses of a manufacturer's lawfully made products; and 2) liability of firearms
13
manufacturers could not be apportioned under a market share theory. More
recently, the New York Court of Appeals on October 21, 2003 declined to hear the
appeal from the decision of the New York Supreme Court, Appellate Division,
affirming the dismissal of New York Attorney General Eliot Spitzer's public
nuisance suit against the Company and other manufacturers and distributors of
firearms. In its decision, the Appellate Division relied heavily on Hamilton in
concluding that it was "legally inappropriate," "impractical," "unrealistic" and
"unfair" to attempt to hold firearms manufacturers responsible under theories of
public nuisance for the criminal acts of others.
Of the lawsuits brought by municipalities, counties or a state Attorney
General, twenty have been concluded: Atlanta - dismissal by intermediate
Appellate Court, no further appeal; Bridgeport - dismissal affirmed by
Connecticut Supreme Court; County of Camden - dismissal affirmed by U.S. Third
Circuit Court of Appeals; Miami - dismissal affirmed by intermediate appellate
court, Florida Supreme Court declined review; New Orleans - dismissed by
Louisiana Supreme Court, United States Supreme Court declined review;
Philadelphia - U.S. Third Circuit Court of Appeals affirmed dismissal, no
further appeal; Wilmington - dismissed by trial court, no appeal; Boston -
voluntary dismissal with prejudice by the City at the close of fact discovery;
Cincinnati - voluntarily withdrawn after a unanimous vote of the city council;
Detroit - dismissed by Michigan Court of Appeals, no appeal; Wayne County -
dismissed by Michigan Court of Appeals, no appeal; New York State - Court of
Appeals denied plaintiff's petition for leave to appeal the Intermediate
Appellate Court's dismissal, no further appeal; Newark - Superior Court of New
Jersey Law Division for Essex County dismissed the case with prejudice; City of
Camden - dismissed on July 7, 2003, not reopened; Jersey City - voluntarily
dismissed and not re-filed; St. Louis - Missouri Supreme Court denied
plaintiffs' motion to appeal Missouri Appellate Court's affirmation of
dismissal; Chicago - Illinois Supreme Court affirmed trial court's dismissal;
and Los Angeles City, Los Angeles County, San Francisco - Appellate Court
affirmed summary judgment in favor of defendants, no further appeal; and
Cleveland - dismissed on January 24, 2006 for lack of prosecution.
The dismissal of the Washington, D.C. municipal lawsuit was sustained on
appeal, but individual plaintiffs were permitted to proceed to discovery and
attempt to identify the manufacturers of the firearms used in their shootings as
"machine guns" under the city's "strict liability" law. On April 21, 2005, the
D.C. Court of Appeals, in an en banc hearing, unanimously dismissed all
negligence and public nuisance claims, but let stand individual claims based
upon a Washington, D.C. act imposing "strict liability" for manufacturers of
"machine guns." Based on present information, none of the Company's products has
been identified with any of the criminal assaults which form the basis of the
individual claims. The writ of certiorari to the United States Supreme Court
regarding the constitutionality of the Washington, D.C. act was denied and the
case was remanded to the trial court for further proceedings. The defendants
subsequently moved to dismiss the case based upon the Protection of Lawful
Commerce in Arms Act, which motion was granted on May 22, 2006. The individual
plaintiffs and the District of Columbia, which has subrogation claims in regard
to the individual plaintiffs, appealed. On January 10, 2008, the District of
Columbia Court of Appeals unanimously upheld the dismissal. On February 22,
2008, the District and the individual plaintiffs filed petitions for rehearing
or rehearing en banc which have not yet been ruled upon.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by
the trial court, but the Indiana Supreme Court reversed this dismissal and
remanded the case for discovery proceedings on December 23, 2003. Gary is
scheduled to begin trial in 2009. The defendants filed a motion to dismiss
pursuant to the Protection of Lawful Commerce in Arms Act ("PLCAA"). The state
court judge held the PLCAA unconstitutional and the defendants filed a motion
with the Indiana Court of Appeals asking it to accept interlocutory appeal on
the issue, which appeal was accepted on February 5, 2007. On October 29, 2007,
the Indiana Appellate Court affirmed, holding that the PLCAA does not apply to
the City's claims. A petition for rehearing was filed in the Appellate Court and
denied on January 9, 2008. On February 8, 2008, a Petition to Transfer the
appeal to the Supreme Court of Indiana was filed, which has not yet been ruled
upon.
In the previously reported New York City municipal case, the defendants
moved to dismiss the suit pursuant to the Protection of Lawful Commerce in Arms
Act. The trial judge found the Act to be constitutional but denied the
defendants' motion to dismiss the case, stating that the Act was not applicable
to the suit. The defendants were given leave to appeal and in fact have appealed
the decision to the U.S. Court of Appeals for the Second Circuit. That appeal
remains pending.
14
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict
rejecting the NAACP's claims. On July 21, 2003, Judge Jack B. Weinstein entered
an order dismissing the NAACP lawsuit, but this order contained lengthy dicta
which defendants believe are contrary to law and fact. Appeals by both sides
were filed, but plaintiffs withdrew their appeal. On August 3, 2004, the United
States Court of Appeals for the Second Circuit granted the NAACP's motion to
dismiss the defendants' appeal of Judge Weinstein's order denying defendants'
motion to strike his dicta made in his order dismissing the NAACP's case, and
the defendants' motion for summary disposition was denied as moot. The ruling of
the Second Circuit effectively confirmed the decision in favor of defendants and
brought this matter to a conclusion.
Legislation has been passed in approximately 34 states precluding suits of
the type brought by the municipalities mentioned above. On the Federal level,
the "Protection of Lawful Commerce in Arms Act" was signed by President Bush on
October 26, 2005. The Act requires dismissal of suits against manufacturers
arising out of the lawful sale of their products for harm resulting from the
criminal or unlawful misuse of a firearm by a third party. The Company is
pursuing dismissal of each action involving such claims, including the municipal
cases described above. The Company was voluntarily dismissed with prejudice on
March 23, 2007 from the previously reported Arnold case. The matter was thus
concluded with no payment by the Company.
Punitive damages, as well as compensatory damages, are demanded in certain
of the lawsuits and claims. Aggregate claimed amounts presently exceed product
liability accruals and applicable insurance coverage. For claims made after July
10, 2000, coverage is provided on an annual basis for losses exceeding $5
million per claim, or an aggregate maximum loss of $10 million annually, except
for certain new claims which might be brought by governments or municipalities
after July 10, 2000, which are excluded from coverage.
Product liability claim payments are made when appropriate if, as, and
when claimants and the Company reach agreement upon an amount to finally resolve
all claims. Legal costs are paid as the lawsuits and claims develop, the timing
of which may vary greatly from case to case. A time schedule cannot be
determined in advance with any reliability concerning when payments will be made
in any given case.
Provision is made for product liability claims based upon many factors
related to the severity of the alleged injury and potential liability exposure,
based upon prior claim experience. Because our experience in defending these
lawsuits and claims is that unfavorable outcomes are typically not probable or
estimable, only in rare cases is an accrual established for such costs. In most
cases, an accrual is established only for estimated legal defense costs. Product
liability accruals are periodically reviewed to reflect then-current estimates
of possible liabilities and expenses incurred to date and reasonably anticipated
in the future. Threatened product liability claims are reflected in our product
liability accrual on the same basis as actual claims; i.e., an accrual is made
for reasonably anticipated possible liability and claims-handling expenses on an
ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes
cannot be made. However, in product liability cases in which a dollar amount of
damages is claimed, the amount of damages claimed, which totaled $5 million and
$0 at December 31, 2007 and 2006, respectively, are set forth as an indication
of possible maximum liability that the Company might be required to incur in
these cases (regardless of the likelihood or reasonable probability of any or
all of this amount being awarded to claimants) as a result of adverse judgments
that are sustained on appeal.
The Company management monitors the status of known claims and the product
liability accrual, which includes amounts for asserted and unasserted claims.
While it is not possible to forecast the outcome of litigation or the timing of
costs, in the opinion of management, after consultation with special and
corporate counsel, it is not probable and is unlikely that litigation, including
punitive damage claims, will have a material adverse effect on the financial
position of the Company, but may have a material impact on the Company's
financial results for a particular period.
15
The Company has reported all cases instituted against it through December
31, 2007 and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports to which reference is hereby made.
NOTE 9 - RELATED PARTY TRANSACTIONS
In February 2008, the Company made a lump sum pension benefit payment to
William B. Ruger, Jr., the former Chairman and Chief Executive Officer of the
Company. This payment totaled $1.1 million which represented the actuarially
determined present value of Mr. Ruger's accrued benefit as of the date of
payment.
In March 2007, the Company sold 42 parcels of non-manufacturing real
property held for investment for $7.3 million to William B. Ruger, Jr. The sales
price was based upon an independent appraisal. The sale included substantially
all of the Company's raw land non-manufacturing real property assets in New
Hampshire. The Company recognized a gain of $5.2 million on the sale. Also in
March 2007, the Company sold several pieces of artwork to members of the Ruger
family for $0.1 million and recognized insignificant gains from these sales.
NOTE 10 - OPERATING SEGMENT INFORMATION
The Company has two reportable segments: firearms and investment castings.
The firearms segment manufactures and sells rifles, pistols, revolvers, and
shotguns principally to a select number of independent wholesale distributors
primarily located in the United States. The investment castings segment
manufactures and sells steel investment castings. Selected operating segment
financial information follows (in thousands):
First Quarter 2008 2007
--------------------------------------------------------------------
Net Sales
Firearms $ 40,030 $ 43,669
Castings
Unaffiliated 2,476 4,787
Intersegment 2,867 2,028
--------------------------------------------------------------------
5,343 6,815
Eliminations (2,867) (2,028)
--------------------------------------------------------------------
$ 42,506 $ 48,456
--------------------------------------------------------------------
Income (Loss) Before Income Taxes
Firearms $ 3,024 $ 10,375
Castings (880) (1,088)
Corporate 198 4,169
--------------------------------------------------------------------
$ 2,342 $ 13,456
--------------------------------------------------------------------
March 29, 2008 December 31, 2007
--------------------------------------------------------------------
Identifiable Assets
Firearms $ 51,117 $ 47,870
Castings 6,262 6,165
Corporate 47,090 47,847
--------------------------------------------------------------------
$104,469 $101,882
--------------------------------------------------------------------
16
NOTE 11 - LINE OF CREDIT
In December 2007, the Company secured a $25 million credit facility with a
bank which terminates on December 13, 2008. Borrowings under this facility bear
interest at LIBOR plus 100 basis points. At March 29, 2008, the Company was in
compliance with the terms and covenants of the credit agreement. The unused fee
is 25 basis points per year on the unused portion of the credit facility. This
credit facility remains unused at March 29, 2008.
NOTE 12 - SUBSEQUENT EVENT
In April 2008, the Company announced that it determined that Ruger SR9
pistols manufactured between October 2007 and April 2008 can, under certain
conditions, fire if dropped with their manual safeties in the "off" or "fire"
position and a round in the chamber. The Company will retrofit all Ruger SR9
pistols with serial number prefix "330" (330-xxxxx) at no charge to the firearm
owners. The estimated cost of this retrofit program of approximately $1.2
million was recorded in the first quarter of 2008. This program is expected to
be in effect for several years. The Company reversed $0.7 million of sales in
anticipation of distributor returns.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Company Overview
Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the
design, manufacture, and sale of firearms to domestic customers. Approximately
94% of the Company's total sales for the first quarter of 2008 were firearms
sales, and 6% were investment castings sales. Export sales represent less than
5% of total sales. The Company's design and manufacturing operations are located
in the United States and substantially all product content is domestic. The
Company's firearms are sold through a select number of independent wholesale
distributors principally to the commercial sporting market.
The Company manufactures investment castings made from steel alloys for
internal use in its firearms and utilizes available investment casting capacity
to manufacture and sell castings to outside customers.
Because most of the Company's competitors are not subject to public filing
requirements and industry-wide data is generally not available in a timely
manner, the Company is unable to compare its performance to other companies or
specific current industry trends. Instead, the Company measures itself against
its own historical results.
The Company does not consider its overall firearms business to be
predictably seasonal; however, sales of many models of firearms are usually
lower in the third quarter of the year.
17
Results of Operations
Summary Unit Data
Firearms unit data for orders, production, shipments and ending inventory
for the last five quarters are as follows:
2008 2007
--------------- ----------------------------------------------------
Q1 Q4 Q3 Q2 Q1
--------------- ----------------------------------------------------
Units Ordered 260,100 113,100 80,900 115,300 175,700
Units Produced 124,000 104,900 100,800 132,000 127,200
Units Shipped 135,700 111,900 98,600 129,600 141,700
Average Sales Price $ 296 $ 283 $ 297 $ 306 $ 308
Units on Backorder 157,100 36,500 35,700 53,400 68,300
Units - Company Inventory
24,900 38,300 45,300 43,100 40,700
Units - Distributor
Inventory
(Note 1) 61,800 62,000 70,500 78,800 60,000
Note 1: Distributor ending inventory as provided by the Company's distributors.
Orders Received and Ending Backlog
The gross value of orders received and ending backlog for the trailing
five quarters are as follows (in millions except average unit value, including
Federal Excise Tax):
2008 2007
---------------- ----------------------------------------------------
Q1 Q4 Q3 Q2 Q1
---------------- ----------------------------------------------------
Orders Received $73.8 $32.8 $25.4 $39.1 $58.9
Average Unit Value of $ 257 $ 262 $ 284 $ 307 $ 303
Orders Received
Ending Backlog $40.7 $17.9 $16.2 $23.3 $27.9
Average Unit Value of
Ending Backlog $ 234 $ 444 $ 411 $ 395 $ 370
Note: Average unit value for orders received and ending backlog is net of
Federal Excise Tax of 10% for handguns and 11% for long guns.
18
The increase in orders received in the fourth quarter of 2007 and the
first quarter of 2008 is primarily attributable to the strong demand for new
product introduced in the fourth quarter of 2007 and the first quarter of 2008.
Certain product lines have been on backorder throughout this five-quarter
period, including new product introductions and low-volume products that were
not in regular production throughout this period.
The decrease in the average sales price of the units in backlog at the end
of the first quarter of 2008 is due to the large quantity of new products on the
backlog with lower unit sales prices.
Orders for certain models totaling $3.7 million and that are not expected
to be fulfilled in the next twelve months have been eliminated from the first
quarter 2008 backlog information. These orders were included in the backlog for
prior periods.
Production
In the first quarter of 2008, the Company continued to work on the
transition from large-scale batch production to lean manufacturing, with an
emphasis on setting up manufacturing cells that facilitate flow production and
pull systems. Many of the initial single-piece flow cells are in place for
assembly and major components manufacturing. The focus now is on establishing
single-piece flow cells for new products and for small parts manufacturing. In
addition to continuing to set up flow cells, the next phase of the lean
transition includes developing pull systems to link the assembly cells,
component manufacturing cells, and parts suppliers. There is also considerable,
on-going engineering work in process to re-engineer existing product designs for
improved manufacturability.
Production rates, which started to increase late in 2007, continued to
improve in the first quarter of 2008. This allowed for an 18% increase in
production from the fourth quarter of 2007. Also, first quarter 2008 production
nearly equaled the production during the first quarter of 2007, when production
benefitted from the higher levels of pre-existing work-in-process inventory
which allowed the Company to produce more units than its staffing and
manufacturing processes would have otherwise allowed.
An increase in firearm unit shipments in near-term future periods is
largely dependent on the Company's ability to increase unit production of those
models in strong demand.
Inventories
The Company's finished goods inventory levels have declined during the
past five quarters, as shipments have approximated or exceeded the Company's
manufacturing capacity. Distributor inventory has remained fairly consistent
during this period, which may be indicative of relatively strong demand at the
retail level.
Sales
Consolidated net sales were $42.5 million for the first quarter of 2008.
This represents a decrease of $6.0 million or 12.3% from consolidated net sales
of $48.5 million in the comparable prior year period.
Firearms net sales were $40.0 million for the first quarter of 2008. This
represents a decrease of $3.7 million or 8.3% from firearm net sales of $43.7
million in the comparable prior year period.
Firearms unit shipments decreased 4.2% for the first quarter of 2008 when
compared to the first quarter of 2007 due principally to a 30% decrease in
beginning finished goods inventory in 2008 compared to 2007, and production
capacity constraints. A shift in product mix toward firearms with lower unit
sales prices, including some new products, resulted in the greater percentage
decrease in sales than unit shipments.
19
Casting net sales were $2.5 million for the first quarter of 2008. This
represents a decrease of $2.3 million or 48.3% from casting sales of $4.8
million in the comparable prior year period.
The casting sales decrease in the first quarter of 2008 reflects the
cessation of titanium casting operations, as previously announced by the Company
in July 2006. Titanium casting sales accounted for $2.4 million or 50.0% of
casting sales for the first quarter of 2007.
Cost of Products Sold and Gross Margin
Consolidated cost of products sold was $31.9 million for the first quarter
of 2008. This represents a decrease of $1.0 million or 3.2% from consolidated
cost of products sold of $32.9 million in the comparable prior year period.
Gross margin as a percent of sales was 25.1% for the first quarter of
2008. This represents a decrease from the gross margin of 32.1% in the
comparable prior year period as illustrated below (in thousands):
----------------------------------------------------------------------------------------------
First Quarter 2008 2007
----------------------------------------------------------------------------------------------
Net sales $42,506 100.0% $48,456 100.0%
Total cost of products sold, before LIFO and
overhead rate adjustments to inventory,
product liability, and product recall 30,820 72.5% 35,561 73.4%
----------------------------------------------------------------------------------------------
Performance gross margin * 11,686 27.5% 12,895 26.6%
----------------------------------------------------------------------------------------------
LIFO expense (income)
98 0.2% (4,423) (9.1)%
Overhead rate adjustments to inventory (464) (1.1)% 1,399 2.9%
Product liability 189 0.5% 356 0.7%
Product recall expense 1,208 2.8% -- --
----------------------------------------------------------------------------------------------
Gross margin $10,655 25.1% $15,563 32.1%
----------------------------------------------------------------------------------------------
* Performance Gross Margin is a measure of gross margin before taking into
account the impact of LIFO and overhead rate adjustments to inventory, and
before product liability and product recall expenses.
Performance Gross Margin-- During the first quarter of 2008, performance gross
margin improved slightly from the comparable prior year period. This may be
attributable in part to the increased rates of production and benefits derived
from the aforementioned lean transition. The increase in performance gross
margin also reflects higher gross margins for some of the recently introduced
new products.
LIFO-- In the first quarter of 2008, gross inventories were reduced by $0.5
million compared to decreases in gross inventories of $16.5 million in the first
quarter of 2007. The 2008 inventory reduction resulted in LIFO expense and
increased cost of products sold of $0.1 million compared to LIFO income and
decreased cost of products sold of $4.4 million in 2007. Inventories are not
expected to fluctuate materially during 2008, in contrast to what they did in
2007.
Overhead Rate Change-- In the first quarter of 2008, the change in inventory
value resulting from the change in the overhead rate used to absorb overhead
expenses into inventory was an increase of $0.5 million. This increase in
inventory value resulted in a decrease to cost of products sold.
20
In the first quarter of 2007, the change in inventory value resulting from the
change in the overhead rate used to absorb overhead expenses into inventory was
a decrease of $1.4 million. This reduction in inventory value resulted in an
increase to cost of products sold.
Product Liability--During the first quarter of 2008, the Company incurred
product liability expense of $0.2 million, which includes the cost of outside
legal fees, insurance, and other expenses incurred in the management and defense
of product liability matters. For the comparable 2007 period, product liability
expenses totaled $0.4 million.
Product Recall--In April 2008, the Company announced that it determined that
Ruger SR9 pistols manufactured between October 2007 and April 2008 can, under
certain conditions, fire if dropped with their manual safeties in the "off" or
"fire" position and a round in the chamber. The Company will retrofit all Ruger
SR9 pistols with serial number prefix "330" (330-xxxxx) at no charge to the
firearm owners. The estimated cost of this retrofit program of approximately
$1.2 million was recorded in the first quarter of 2008. This program is expected
to be in effect for several years. The Company reversed $0.7 million of sales in
anticipation of distributor returns.
Gross Margin--Gross margin was $10.7 million or 25.1% of sales in the first
quarter of 2008. This is a decrease of $4.9 million or 31.5% from the first
quarter of 2007 gross margin of $15.6 million or 32.1% of sales.
Selling, General and Administrative
Selling, general and administrative expenses were $8.3 million in the
first quarter of 2008. This represents an increase of $0.6 million from selling,
general and administrative expenses of $7.7 million in the first quarter of
2007. The increase reflects a retail co-op advertising program that was
introduced on January 1, 2008 and increased promotional and advertising
expenses, many of which related to new products.
Severance expense of $0.7 million was recorded in the first quarter of
2008. This expense relates to one former executive and one current executive who
will leave the Company effective May 1, 2008. In the first quarter of 2007,
severance expense was $1.0 million, primarily related to a voluntary reduction
in force during that quarter.
Gain on Sale of Real Estate
In the first quarter of 2007, the Company recorded a $5.2 million gain on
sale of largely undeveloped non-manufacturing real property held for investment.
No real estate sales were made in the first quarter of 2008. The Company has two
properties in Connecticut and one property in New Hampshire listed for sale. The
timing on when these properties will sell is very uncertain due to the weak real
estate markets and tight credit environment.
Interest income
Interest income was $0.2 million in the first quarter of 2008. This
represents a decrease of $0.2 million from interest income of $0.4 million in
the first quarter of 2007. The decrease is attributable to decreased principal
invested in 2008 compared to 2007 and lower interest rates.
Income Taxes and Net Income
The effective income tax rates in the first quarter of 2008 and 2007 were
38.0% and 40.1%, respectively.
As a result of the foregoing factors, consolidated net income was $1.5
million in the first quarter of 2008. This represents a decrease of $6.6 million
from consolidated net income of $8.1 million in the first quarter of 2007.
21
Financial Condition
Operations
At March 29, 2008, the Company had cash, cash equivalents and short-term
investments of $34.2 million. The Company's pre-LIFO working capital of $98.9
million, less the LIFO reserve of $47.0 million, resulted in working capital of
$51.9 million and a current ratio of 3.2 to 1.
Cash provided by operating activities was $0.6 million and $18.1 million
for the first quarter of 2008 and 2007, respectively. The decrease in cash
provided in 2008 compared to 2007 is principally attributable to the significant
reduction in gross inventory in 2007.
Third parties supply the Company with various raw materials for its
firearms and castings, such as fabricated steel components, walnut, birch,
beech, maple and laminated lumber for rifle and shotgun stocks, wax, ceramic
material, metal alloys, various synthetic products and other component parts.
There is a limited supply of these materials in the marketplace at any given
time, which can cause the purchase prices to vary based upon numerous market
factors. The Company believes that it has adequate quantities of raw materials
in inventory to provide ample time to locate and obtain additional items at
then-current market cost without interruption of its manufacturing operations.
However, if market conditions result in a significant prolonged inflation of
certain prices or if adequate quantities of raw materials can not be obtained,
the Company's manufacturing processes could be interrupted and the Company's
financial condition or results of operations could be materially adversely
affected.
Investing and Financing
Capital expenditures for the first quarter of 2008 totaled $1.9 million.
For the past two years, capital expenditures averaged approximately $1.0 million
per quarter. In 2008, the Company expects to spend approximately $5 million to
$6 million on capital expenditures to purchase tooling for new product
introductions and to upgrade and modernize manufacturing equipment, primarily at
the Newport Firearms and Pine Tree Castings Divisions. The Company finances, and
intends to continue to finance, all of these activities with funds provided by
operations and current cash and short-term investments.
In January 2007, the Company announced that its Board of Directors
authorized a stock repurchase program. During the fourth quarter of 2007, the
Company repurchased 2,216,000 shares of its common stock, representing 9.7% of
the then-outstanding shares, in the open market at an average price of $8.99 per
share. These purchases were made with cash held by the Company and no debt was
incurred.
There were no dividends paid in the first quarter of 2008. The payment of
future dividends depends on many factors, including internal estimates of future
performance, then-current cash and short-term investments, and the Company's
need for funds. The Company does not expect to pay dividends in the near term.
In March 2007, the Company sold 42 parcels of non-manufacturing real
property for $7.3 million to William B. Ruger, Jr., the Company's former Chief
Executive Officer and Chairman of the Board. The sale included substantially all
of the Company's raw land real property assets in New Hampshire. The sales price
was based upon an independent appraisal, and the Company recognized a gain of
$5.2 million on the sale.
In April 2007, the Company sold a non-manufacturing facility in Arizona
for $5.0 million. This facility had not been used in the Company's operations
for several years. The Company realized a gain of approximately $1.5 million
from this sale.
In the third quarter of 2007, the Company amended its hourly and salaried
defined benefit pension plans so that employees no longer accrue benefits under
them effective December 31, 2007. This action "freezes" the benefits for all
employees and prevents future hires from joining the plans, effective December
22
31, 2007. Starting January 1, 2008, the Company provides supplemental
discretionary contributions to substantially all employees' individual 401(k)
accounts. Costs attributable to the discretionary supplemental 401(k) Plan
totaled $0.4 million in the first quarter of 2008. The Company plans to
contribute an additional $1.1 million to the 401(k) plan during the remainder of
2008.
In late 2007, after authorizing the "freeze" amendment to its hourly and
salaried defined benefit pension plans, the Company contributed an additional $5
million to these plans. The intent of this discretionary contribution was to
reduce the amount of time that the Company will be required to continue to
operate the frozen plans. The ongoing cost of running the plans (even if frozen)
is approximately $0.2 million per year, which includes PBGC premiums, actuary
and audit fees, and other expenses.
In 2008 and future years, the Company may be required to make cash
contributions to the two defined benefit pension plans according to the new
rules of the Pension Protection Act of 2006. The annual contributions will be
based on the amount of the unfunded plan liabilities derived from the frozen
benefits and will not include liabilities for any future accrued benefits for
any new or existing participants. The total amount of these future cash
contributions will be dependent on the investment returns generated by the
plans' assets and the then-applicable discount rates used to calculate the
plans' liabilities.
There is no minimum required cash contribution for the defined benefit
plans for 2008. However, the Company expects to contribute $0.5 million to the
defined benefit plans in 2008. The intent of this discretionary contribution in
2008 is to reduce the amount of time that the Company will continue to incur
costs to operate the frozen plans.
The total annual cash outlays for retirement benefits, which include the
continuing funding of the two defined benefit pension plans and the new
supplemental discretionary 401(k) contributions, are expected to be comparable
to the previous retirement funding levels.
In February 2008, the Company made lump sum benefit payments to two
participants in its only non-qualified defined benefit plan, the Supplemental
Executive Retirement Plan. These payments, which totaled $2.1 million,
represented the actuarial present value of the participants' accrued benefit as
of the date of payment. Only one, retired participant remains in this plan.
Firearms Litigation
As of March 29, 2008, the Company is a defendant in approximately 5
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into two categories:
(iii) those that claim damages from the Company related to allegedly
defective product design which stem from a specific incident.
Pending lawsuits and claims are based principally on the theory of
"strict liability" but also may be based on negligence, breach of
warranty, and other legal theories; and
(iv) those brought by cities or other governmental entities, and
individuals against firearms manufacturers, distributors and dealers
seeking to recover damages allegedly arising out of the misuse of
firearms by third parties in the commission of homicides, suicides
and other shootings involving juveniles and adults. The complaints
by municipalities seek damages, among other things, for the costs of
medical care, police and emergency services, public health services,
and the maintenance of courts, prisons, and other services. In
certain instances, the plaintiffs seek to recover for decreases in
property values and loss of business within the city due to criminal
violence. In addition, nuisance abatement and/or injunctive relief
is sought to change the design, manufacture, marketing and
distribution practices of the various defendants. These suits
allege, among other claims, strict liability or negligence in the
design of products, public nuisance, negligent entrustment,
negligent distribution, deceptive or fraudulent advertising,
violation of consumer protection statutes and conspiracy or concert
of action theories. Most of these cases do not allege a specific
injury to a specific individual as a result of the misuse or use of
any of the Company's products.
23
The Company has expended significant amounts of financial resources and
management time in connection with product liability litigation. Management
believes that, in every case involving firearms, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses further exist to the suits brought
by governmental entities based, among other reasons, on established state law
precluding recovery for essential government services, the remoteness of the
claims, the types of damages sought to be recovered, and limitations on the
extraterritorial authority which may be exerted by a city, municipality, county
or state under state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a constitutional
jury, Hamilton, et al. v. Accu-tek, et al., resulted in a defense verdict in
favor of the Company on February 11, 1999. In that case, numerous firearms
manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and "industry-wide" liability. The Company and
its marketing and distribution practices were exonerated from any claims of
negligence in each of the seven cases decided by the jury. In subsequent
proceedings involving other defendants, the New York Court of Appeals as a
matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a manufacturer's lawfully made
products; and 2) liability of firearms manufacturers could not be apportioned
under a market share theory. More recently, the New York Court of Appeals on
October 21, 2003 declined to hear the appeal from the decision of the New York
Supreme Court, Appellate Division, affirming the dismissal of New York Attorney
General Eliot Spitzer's public nuisance suit against the Company and other
manufacturers and distributors of firearms. In its decision, the Appellate
Division relied heavily on Hamilton in concluding that it was "legally
inappropriate," "impractical," "unrealistic" and "unfair" to attempt to hold
firearms manufacturers responsible under theories of public nuisance for the
criminal acts of others.
Of the lawsuits brought by municipalities, counties or a state Attorney
General, twenty have been concluded: Atlanta - dismissal by intermediate
Appellate Court, no further appeal; Bridgeport - dismissal affirmed by
Connecticut Supreme Court; County of Camden - dismissal affirmed by U.S. Third
Circuit Court of Appeals; Miami - dismissal affirmed by intermediate appellate
court, Florida Supreme Court declined review; New Orleans - dismissed by
Louisiana Supreme Court, United States Supreme Court declined review;
Philadelphia - U.S. Third Circuit Court of Appeals affirmed dismissal, no
further appeal; Wilmington - dismissed by trial court, no appeal; Boston -
voluntary dismissal with prejudice by the City at the close of fact discovery;
Cincinnati - voluntarily withdrawn after a unanimous vote of the city council;
Detroit - dismissed by Michigan Court of Appeals, no appeal; Wayne County -
dismissed by Michigan Court of Appeals, no appeal; New York State - Court of
Appeals denied plaintiff's petition for leave to appeal the Intermediate
Appellate Court's dismissal, no further appeal; Newark - Superior Court of New
Jersey Law Division for Essex County dismissed the case with prejudice; City of
Camden - dismissed on July 7, 2003, not reopened; Jersey City - voluntarily
dismissed and not re-filed; St. Louis - Missouri Supreme Court denied
plaintiffs' motion to appeal Missouri Appellate Court's affirmation of
dismissal; Chicago - Illinois Supreme Court affirmed trial court's dismissal;
and Los Angeles City, Los Angeles County, San Francisco - Appellate Court
affirmed summary judgment in favor of defendants, no further appeal; and
Cleveland - dismissed on January 24, 2006 for lack of prosecution.
The dismissal of the Washington, D.C. municipal lawsuit was sustained on
appeal, but individual plaintiffs were permitted to proceed to discovery and
attempt to identify the manufacturers of the firearms used in their shootings as
"machine guns" under the city's "strict liability" law. On April 21, 2005, the
D.C. Court of Appeals, in an en banc hearing, unanimously dismissed all
negligence and public nuisance claims, but let stand individual claims based
upon a Washington, D.C. act imposing "strict liability" for manufacturers of
"machine guns." Based on present information, none of the Company's products has
been identified with any of the criminal assaults which form the basis of the
24
individual claims. The writ of certiorari to the United States Supreme Court
regarding the constitutionality of the Washington, D.C. act was denied and the
case was remanded to the trial court for further proceedings. The defendants
subsequently moved to dismiss the case based upon the Protection of Lawful
Commerce in Arms Act, which motion was granted on May 22, 2006. The individual
plaintiffs and the District of Columbia, which has subrogation claims in regard
to the individual plaintiffs, appealed. On January 10, 2008, the District of
Columbia Court of Appeals unanimously upheld the dismissal. On February 22,
2008, the District and the individual plaintiffs filed petitions for rehearing
or rehearing en banc which have not yet been ruled upon.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by
the trial court, but the Indiana Supreme Court reversed this dismissal and
remanded the case for discovery proceedings on December 23, 2003. Gary is
scheduled to begin trial in 2009. The defendants filed a motion to dismiss
pursuant to the Protection of Lawful Commerce in Arms Act ("PLCAA"). The state
court judge held the PLCAA unconstitutional and the defendants filed a motion
with the Indiana Court of Appeals asking it to accept interlocutory appeal on
the issue, which appeal was accepted on February 5, 2007. On October 29, 2007,
the Indiana Appellate Court affirmed, holding that the PLCAA does not apply to
the City's claims. A petition for rehearing was filed in the Appellate Court and
denied on January 9, 2008. On February 8, 2008, a Petition to Transfer the
appeal to the Supreme Court of Indiana was filed, which has not yet been ruled
upon.
In the previously reported New York City municipal case, the defendants
moved to dismiss the suit pursuant to the Protection of Lawful Commerce in Arms
Act. The trial judge found the Act to be constitutional but denied the
defendants' motion to dismiss the case, stating that the Act was not applicable
to the suit. The defendants were given leave to appeal and in fact have appealed
the decision to the U.S. Court of Appeals for the Second Circuit. That appeal
remains pending.
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict
rejecting the NAACP's claims. On July 21, 2003, Judge Jack B. Weinstein entered
an order dismissing the NAACP lawsuit, but this order contained lengthy dicta
which defendants believe are contrary to law and fact. Appeals by both sides
were filed, but plaintiffs withdrew their appeal. On August 3, 2004, the United
States Court of Appeals for the Second Circuit granted the NAACP's motion to
dismiss the defendants' appeal of Judge Weinstein's order denying defendants'
motion to strike his dicta made in his order dismissing the NAACP's case, and
the defendants' motion for summary disposition was denied as moot. The ruling of
the Second Circuit effectively confirmed the decision in favor of defendants and
brought this matter to a conclusion.
Legislation has been passed in approximately 34 states precluding suits of
the type brought by the municipalities mentioned above. On the Federal level,
the "Protection of Lawful Commerce in Arms Act" was signed by President Bush on
October 26, 2005. The Act requires dismissal of suits against manufacturers
arising out of the lawful sale of their products for harm resulting from the
criminal or unlawful misuse of a firearm by a third party. The Company is
pursuing dismissal of each action involving such claims, including the municipal
cases described above. The Company was voluntarily dismissed with prejudice on
March 23, 2007 from the previously reported Arnold case. The matter was thus
concluded with no payment by the Company.
Punitive damages, as well as compensatory damages, are demanded in certain
of the lawsuits and claims. Aggregate claimed amounts presently exceed product
liability accruals and applicable insurance coverage. For claims made after July
10, 2000, coverage is provided on an annual basis for losses exceeding $5
million per claim, or an aggregate maximum loss of $10 million annually, except
for certain new claims which might be brought by governments or municipalities
after July 10, 2000, which are excluded from coverage.
Product liability claim payments are made when appropriate if, as, and
when claimants and the Company reach agreement upon an amount to finally resolve
all claims. Legal costs are paid as the lawsuits and claims develop, the timing
of which may vary greatly from case to case. A time schedule cannot be
determined in advance with any reliability concerning when payments will be made
in any given case.
25
Provision is made for product liability claims based upon many factors
related to the severity of the alleged injury and potential liability exposure,
based upon prior claim experience. Because our experience in defending these
lawsuits and claims is that unfavorable outcomes are typically not probable or
estimable, only in rare cases is an accrual established for such costs. In most
cases, an accrual is established only for estimated legal defense costs. Product
liability accruals are periodically reviewed to reflect then-current estimates
of possible liabilities and expenses incurred to date and reasonably anticipated
in the future. Threatened product liability claims are reflected in our product
liability accrual on the same basis as actual claims; i.e., an accrual is made
for reasonably anticipated possible liability and claims-handling expenses on an
ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes
cannot be made. However, in product liability cases in which a dollar amount of
damages is claimed, the amount of damages claimed, which totaled $5 million and
$0 at December 31, 2007 and 2006, respectively, are set forth as an indication
of possible maximum liability that the Company might be required to incur in
these cases (regardless of the likelihood or reasonable probability of any or
all of this amount being awarded to claimants) as a result of adverse judgments
that are sustained on appeal.
The Company management monitors the status of known claims and the product
liability accrual, which includes amounts for asserted and unasserted claims.
While it is not possible to forecast the outcome of litigation or the timing of
costs, in the opinion of management, after consultation with special and
corporate counsel, it is not probable and is unlikely that litigation, including
punitive damage claims, will have a material adverse effect on the financial
position of the Company, but may have a material impact on the Company's
financial results for a particular period.
The Company has reported all cases instituted against it through December
31, 2007 and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports to which reference is hereby made.
Other Operational Matters
In the normal course of its manufacturing operations, the Company is
subject to occasional governmental proceedings and orders pertaining to waste
disposal, air emissions and water discharges into the environment. The Company
believes that it is generally in compliance with applicable environmental
regulations and the outcome of such proceedings and orders will not have a
material adverse effect on the financial position or results of operations of
the Company.
The Company self-insures a significant amount of its product liability,
workers' compensation, medical, and other insurance. It also carries significant
deductible amounts on various insurance policies.
The Company expects to realize its deferred tax assets through tax
deductions against future taxable income.
Historically, the Company has not required external financing. Based on
its unencumbered assets, the Company believes it has the ability to raise
substantial amounts of cash through issuance of short-term or long-term debt. In
the fourth quarter of 2007, the Company secured a $25 million credit facility,
which terminates on December 13, 2008. This credit facility remains unused.
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its critical accounting
estimates and assumptions described in the Company's 2007 Annual Report on Form
10-K filed on February 26, 2008, or the judgments affecting the application of
those estimates and assumptions.
26
Recent Accounting Pronouncements:
In September 2006, FASB issued FAS No. 157, "Fair Value Measurements" (FAS
157). FAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for the fiscal year beginning January 1, 2008. The FASB has deferred
the implementation of FAS 157 by one year for certain non-financial assets and
liabilities such as this will be effective for the fiscal year beginning January
1, 2009. The adoption of FAS 157 did not have a material impact on the Company's
financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("FAS 141R"). FAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. FAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. FAS 141R is effective for the fiscal year
beginning January 1, 2009, and will be adopted by the Company in the first
quarter of 2009. The adoption of FAS 141R is not expected to have a material
impact on the Company's financial position, results of operations and cash
flows.
Forward-Looking Statements and Projections
The Company may, from time to time, make forward-looking statements and
projections concerning future expectations. Such statements are based on current
expectations and are subject to certain qualifying risks and uncertainties, such
as market demand, sales levels of firearms, anticipated castings sales and
earnings, the need for external financing for operations or capital
expenditures, the results of pending litigation against the Company including
lawsuits filed by mayors, state attorneys general and other governmental
entities and membership organizations, and the impact of future firearms control
and environmental legislation, any one or more of which could cause actual
results to differ materially from those projected. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date made. The Company undertakes no obligation to publish revised
forward-looking statements to reflect events or circumstances after the date
such forward-looking statements are made or to reflect the occurrence of
subsequent unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this interest rate
market risk exposure to be material to its financial condition or results of
operations. The Company invests primarily in a bank-managed money market fund
that invests principally in United States Treasury instruments, all maturing
within one year. The carrying amount of these investments approximates fair
value due to the short-term maturities. Under its current policies, the Company
does not use derivative financial instruments, derivative commodity instruments
or other financial instruments to manage its exposure to changes in interest
rates or commodity prices.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Treasurer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (the
"Disclosure Controls and Procedures"), as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of the March 29, 2008.
27
Based on the evaluation, the Company's Chief Executive Officer and
Treasurer and Chief Financial Officer have concluded that, as of March 29, 2008,
such disclosure controls and procedures are effective to ensure that information
required to be disclosed in the Company's periodic reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission's rules and forms.
Additionally, the Company's Chief Executive Officer and Treasurer and Chief
Financial Officer have concluded that, as of the end of the period covered by
this Quarterly Report on Form 10-Q, there have been no changes in the Company's
control over financial reporting that occurred during the quarter ended March
29, 2008 that have materially affected, or are reasonably likely to materially
affect, the Company's control over financial reporting.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at
Note 8 to this Form 10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through December
31, 2007, and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-Q and 10-K reports, to which reference is hereby made.
No cases were formally instituted against the Company during the first
quarter of 2008.
During the first quarter of 2008, no previously reported cases were
settled.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from the
information provided in Item 1A. Risk Factors included in our Annual
Report on Form 10-K for the year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
28
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits:
31.1 Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
29
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE FIRST QUARTER OF 2008
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STURM, RUGER & COMPANY, INC.
----------------------------------------
Date: April 21, 2008 /s/ THOMAS A. DINEEN
----------------------------------------
Thomas A. Dineen
Principal Financial Officer,
Vice President, Treasurer and
Chief Financial Officer
30